Why Are Natural Gas Prices So Volatile?

Like other commodities, supply and demand governs natural gas prices. But predicting demand can be complicated in the gas market.

That's because the weather, especially winter weather, can have a major impact on natural gas demand. Natural gas is most often used for heating. Colder temperatures mean homes and businesses need more heat, increasing demand for gas.

But the weather is hard to predict. An unexpectedly warm winter could sink demand and lower prices. Similarly, a long period of freezing temperatures can force natural gas prices higher as households turn up their heat.

Because natural gas prices can be so volatile, investors often trade futures contracts to hedge against price swings.

Spot prices are determined based on current market value at the Henry Hub in Louisiana, where nine natural gas pipelines connect. Futures contracts allow investors to lock in a price months in advance.

If, for instance, an investor purchases a futures contract for March and March spot prices end up being higher, the investor can sell the contract for a profit. Or the investor can purchase the gas for the contracted price, below market value.

This is why long-range weather forecasts have a big impact on natural gas futures. Futures traders try to lock in a price based on what they think energy demand will be. And this year's weather forecast is affecting futures already.

The "Old Farmer's Almanac" is a famed source for predicting long-term weather trends. The "Almanac" is calling for a colder winter than last year. Accordingly, futures contracts for February are currently trading at $3.32, a 67% increase over last February's prices.

However, natural gas is now used for a number of energy needs outside of heating. Natural gas is in the middle of replacing coal and oil as a cheap, reliable, and less-polluting energy source.

And new developments in the natural gas market mean demand could be pushed higher even without a frigid winter. That's why we're predicting higher natural gas prices in 2017.

Our 2017 Natural Gas Price Prediction

Good to know! Finally gas is steadily going up. I has been a rough few years!!
I hope your prediction for 2017 is correct! If it is a colder winter, then the supply will run down and that will be a good thing.. It sure has been cold in Colorado!

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